'Turning Back the Clock on Trade' to Handicap Economic Growth, IMF Says
A new report from the International Monetary Fund warns that isolationist policies aimed at “turning back the clock on trade” will have wide-ranging consequences and “only deepen and prolong the world economy’s current doldrums.”
The IMF on Tuesday published its World Economic Outlook report, in which it projects global growth will hit only 3.1 percent this year and 3.4 percent in 2017. The group’s projections were revised down slightly from where they were in April, due primarily to “the June U.K. vote in favor of leaving the European Union (Brexit) and weaker-than-expected growth in the United States.”
“Taken as a whole, the world economy has moved sideways,” Maurice Obstfeld, chief economist and economic counselor at the IMF, said in a statement accompanying the report, warning that it is “vitally important to defend the prospects for increasing trade integration.”
IMF researchers generally subscribe to the notion that open trade policies are mutually beneficial on net, though there can be “winners and losers from increasing trade openness, especially in the short term.”
The study acknowledges the complaints voiced by many in the U.S. today who feel globalization has left millions of domestic workers behind. But it notes that this line of thinking doesn’t take the full benefits of open trade policies into consideration, ignoring “the long-term benefits of economic integration.”
“A global environment hostile to trade will make it impossible for commodity exporters and low-income countries in general to develop new export models and gradually narrow income gaps with richer countries,” the report said. “It will also broadly deter global productivity growth, the spread of knowledge and technology, and investment.”
The lengthy 288-page report references Brexit on more than two dozen occasions in noting that “political tensions have now made advanced economies a major locus of policy uncertainty.” Global stocks plummeted in the immediate aftermath of the U.K.’s June 23 referendum vote, which was widely viewed as an isolationist move motivated in part by issues like immigration and trade. In the aftermath, though, international investors have sought to minimize exposure to British volatility by reallocating their funds elsewhere.
The investment exodus has since caused the pound to plummet and strengthened currencies considered safe havens like the U.S. dollar. On Tuesday, the pound sterling fell to its lowest level in more than 30 years against the dollar – a decline that is believed to have been sparked by U.K. Prime Minister Theresa May’s comments over the weekend that her country would begin formal Brexit negotiations by the end of March 2017.
“Until the talks start, there will be no clear answers to the important questions about the U.K.’s future relationship with the EU or the rest of the world, and this is going to create ongoing uncertainty,” Nigel Green, founder and CEO of deVere Group, wrote in a research note Tuesday. “This uncertainty suggests a higher risk for investors, and it can be expected that as a direct response many will dump U.K. assets as a precautionary measure.”
The IMF report notes that the Brexit decision was fueled by a lot of the same isolationist sentiments that pervade the American political landscape today. Both Democratic nominee Hillary Clinton and Republican candidate Donald Trump have voiced their disapproval for trade deals like the Trans-Pacific Partnership, though Trump has gone a step further in calling for a reshuffling of North American Free Trade Agreement terms and indicating he’d be willing to hold U.S. membership in the World Trade Organization hostage in order to negotiate more favorable terms.
The same kind of asset flight that was seen in the U.K. post-Brexit is unlikely to play out in the U.S., regardless of which candidate triumphs on Election Day next month. But the IMF report notes that isolationist policies – particularly as they relate to trade – often come with unintended consequences that can extend well beyond a particular country’s own borders. The current strength of the U.S. dollar – which naturally makes American exports less appealing when exchange rates are factored in – is one such example.
“Trade liberalization can improve productivity, raise overall living standards and promote economic growth through a number of channels. The best-known benefit from trade is that it induces factors of production – such as capital and labor – to be used more efficiently,” the report said, though it noted that “the earnings and employment prospects of workers in sectors and firms competing with foreign imports may be adversely affected.”
Open trade is not without its drawbacks, and the IMF report indicated “the adjustment costs that further trade liberalization entails for certain workers should not be underestimated.” But it suggested such policies are necessary to kick-start economic growth both at home and abroad and that governments should be more focused on policy measures – namely, low interest rates and accommodative monetary policy – that help stimulate economic growth and drive citizens out of unemployment.
“Policymakers must address the backlash against global trade by refocusing the discussion on the long-term benefits of economic integration and ensuring that well-targeted social initiatives help those who are adversely affected and facilitate, through retraining, their absorption into expanding sectors,” the report said.